Sly Stone's Financial Downfall Detailed in Court Ruling

The psychedelic funk superstar alleged that in 1989, he was induced into giving up much of his song royalties by a manager and attorney fueling his drug addictions. Sony Music and Warner Music won't have to pay for that.

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Sly Stone

Anyone curious how a mega-successful musician -- one inducted into the Rock and Roll Hall of Fame -- can go 30 years nearly penniless should read a decision by a California appeals court on Thursday.

The subject of the ruling is Sly Stone, born as Sylvester Stewart, who as the frontman for Sly and the Family Stone blazed a path for a progressive mixture of funk, soul and psychedelic music and whose songs like "Everyday People" and "Hot Fun in the Summertime" remain well-played on radio.

Stone's troubles with drugs and the Internal Revenue Service are well known, but in a lawsuit over "tens of millions" of dollars in allegedly misappropriated royalties against nearly three dozen individuals and entities, including an ex-manager, a lawyer and Sony, Warner and Broadcast Music Inc (BMI), he detailed the full extent of his financial troubles and poor dealmaking. Unfortunately, for Stone, an appeals court isn't giving him much relief.

We'll pick up Stone's story in the mid-70s when, already a successful musician, he began to run into some personal problems that required Ken Roberts, Stone's friend and onetime manager, to advance him some money to pay off some debts. In return, Stone irrevocably assigned Roberts his BMI-administered performance-right royalties.

Then, in 1980, the IRS levied a multimillion-dollar tax lien upon Stone's income. For about the next 15 years, much of the money that was derived from Stone's hit songs was routed to government tax collectors.

In 1985, Stone sold his publishing interest in most of his existing musical compositions to Michael Jackson's MiJac Music company but retained the songwriter's share of the royalties. But that too ended up with the IRS.

What then happened in 1989 is the source of controversy that fuels the multimillion-dollar dispute. Stone says he turned to Jerry Goldstein, who he had known for more than 20 years, to manage his affairs. Goldstein was working with an attorney named Glenn Stone.

By the late 1980s, according to the court documents, Sly Stone's addiction to cocaine and sedatives had resulted in him becoming a fugitive, and without any record deal, he was also destitute. Here's what happened next, according to the ruling (which can be read in full here), which in standard fashion presents facts in a way that assumes the truth of plaintiff's allegations:

"Between December of 1988 and February of 1989 Goldstein, through his company Goldstein Music, made approximately 30 loans to Stewart in amounts ranging from one hundred to several hundred dollars. The money was used to pay Stewart’s living expenses and to fuel his drug addictions. Goldstein and attorney Stone gave cocaine to Stewart on several occasions. In late February of 1989, Goldstein, Topley and attorney Stone told Stewart that Goldstein had obtained a new recording contract for Stewart. They told Stewart there would be no more loans or drugs, and no recording contract, unless Stewart signed an agreement providing that their entity, Even Street, would become manager of all of Stewart’s personal and professional financial affairs. They promised to help Stewart and advised that because of the tax problems, Stewart should not have any assets in his name or receive royalties directly."

Stone agreed to the arrangement and signed two contracts -- a "Shareholder's Agreement" and an "Employment Agreement."

Then, Goldstein took control of Sly Stone's financial affairs and dealt with his old record label at Sony, his song publishing company at Warner and BMI too. Goldstein's companies arranged for banks to make loans of at least $5 million, secured in part by Stone's future music royalties. When money came in from Warner and BMI, they went to the bank to pay off the balance of the loan (and then to Goldstein's companies). Between 1996 and 2009, BMI paid out almost $3.3 million alone, and Stone saw almost none of it.

Meanwhile, Goldstein's attorney negotiated an end in 1996 to the lien that placed by the IRS on Stone's income. Neither Stone nor his ex-manager Roberts were aware that happened -- and that royalties were not heading to tax collectors anymore but to banks and Goldstein companies.

In 2008, Goldstein is said to have stopped giving Stone advances, leaving him destitute. That's when Stone took a look at the 1989 contracts and objected, going to Sony, BMI and Warner for intervention. Royalty distributions were suspended. And eventually, the situation became the subject of a complex lawsuit with Stone and Roberts together suing all those who allegedly had "induced" the musician to sign agreements that "diverted" their money.

The California Appeals Court ruling Thursday only addresses the liability of the big music companies -- Sony, BMI and Warner -- that allegedly allowed royalties to be diverted without doing the necessary due diligence.

In short, Stone may have made bad deals, but for the purposes of holding these companies accountable, the appeals court affirms that he has no standing to sue. He can't allege breach of contract against BMI because he assigned his royalty payments to Roberts. He can't make various claims against Sony because the record label "properly relied on" those 1989 agreements presented when figuring out where to direct royalties. Similarly, he can't sue Warner. Quoting the trial judge, the appeals court notes "the royalty companies were simply doing what they were instructed to do for years upon years.”

That said, Roberts enjoys a better outcome from Thursday's ruling. Initially, before the IRS put a lien on Stone's BMI payments, the money was going to a company Stone's ex-manager had set up called "Majoken." Years later, after the money stopped flowing to the IRS, Goldstein allegedly set up a new entity that was also called "Majoken Inc." BMI didn't know about the existence of two companies with the same name until 2009, by which time it had paid out approximately $600,000 in royalties from Stone's music to Goldstein's company.

In the ruling, an appeals court overturns the trial judge's ruling that Roberts lacked standing to sue BMI. It also waives away BMI's contention that his claim of breach of contract is barred by statute of limitations, although the appeals judge says he can only possibly collect for four years prior to the launch of the lawsuit for allegedly bad actions. Yes, BMI paid out to Majoken, but the appeals court says "that is neither the beginning nor the end of the story" as "BMI had a contractual duty to insist on written instructions from Roberts" when in 1996, it changed where the money was going.

Still, that's hardly a saving grace for Stone, who not only loses the appeal but is now responsible for some of Sony, Warner and BMI's legal costs.